Wood Cuts - January 2013

After several years of declining or flat prices for hardwood flooring, there finally appears to be a slight upswing in the wood flooring market. This is encouraging news for manufacturers that have endured sustained raw lumber price increases on top of periodic lumber shortages, especially considering that it is the manufacturers who have had to absorb these cost increases as demand declined.

The reasons for this are now quite clear. The decline in housing construction and the remodeling market has had a tremendous impact on the demand for hardwood flooring. As housing starts declined, less flooring was needed. This led to decreased demand for lumber, and many foresters had little incentive to harvest their trees with prices so low. Then, when the economy turned south, and many consumers found themselves out of work or concerned about their long-term job security, consumer spending decreased, which impacted the remodeling market as well. The bottom line is that consumer confidence was at an all-time low, and discretionary spending on luxury items like hardwood flooring all but ceased for several years.

To put this into perspective, the Hardwood Market Report (HMR) analyzed the U.S. new home supply pipeline in its December 7, 2012 issue. Their report indicated that the total U.S. new home housing supply peaked in May 2006 with 1,981,000 units. Fast forward to October 2012, and that number decreased to 674,300 units, a decline of 66% in just six years.

Fortunately, however, the housing market is now on the rebound. October 2012 new single-family homes sales rose 17.2% from October 2011, with the median price rising 5.7% during the same period of time. This is encouraging news as new home sales lead to new flooring sales.

Pierre Thabet, president of Boa-Franc (Mirage), sums up the situation quite succinctly: “Prices have been so low for so long that, unlike interest rates, there is only one way to go, and it is up.” He concedes that prices today are still lower than they were pre-recession, but says that they are rebounding. Thabet states that, like any consumer product, the rate of the rebound will be a function of supply and demand.

Supply could be a significant concern, according to Neil Poland, president of Mullican Flooring. Poland estimates that prices for logs and lumber have increased by 20% to 30% during the last 90 days in response to an overall restructuring of the raw material supply chain. The restructure has resulted in significantly lower volumes and the inability to respond to the slight increase in demand the industry is now seeing. Poland gives several reasons for these supply constraints. “The landowner has been unwilling to sell his timber due to the low stumpage prices,” he explains, and “the supply of loggers has decreased tremendously during the recession.” He adds that demand has increased in other industries as well, including truck flooring, industrial applications, mining, drilling, and railroad ties, which puts further strains on the supply chain for wood flooring, but most significantly, “the actual number of sawmills operating has decreased by more than 50% since 2006.” This has an obvious impact on supply as demand is now increasing.

Don Finkell, president of Anderson Hardwood Floors, a division of Shaw Industries, points out that many loggers have left the industry, leading to a low supply during a period of increasing demand. Finkell identifies the recurring theme that the increases in raw material prices are a result of the increase in business that the industry has seen recently, as well as the reduced capacity in supply as a result of the recession.

Mannington’s Kim Holm further reinforces this industry sentiment. “Wood flooring pricing is severely depressed from pre-recession levels,” states Holm, who believes that this was brought on by over capacity due to the reduced level of demand. Holm also states that prices for domestic products were further impacted by low-cost Chinese imports, but that currently the main influence is the “uptick in the builder business driving demand for lumber and timber” while supplies remain low. Holm remains positive, however, adding that “this is a much needed increase for the industry.”

To illustrate how material costs can impact industry prices, consider statistics provided in the 2012 U.S. FLOOReport from Market Insights/Torcivia, which reports that in 2005, material costs represented 57% of wood flooring production costs, while hardwood lumber dominates material costs, accounting for 74% of the cost of all materials. And while these costs continue to rise, the average wholesale value per square foot for wood flooring was $2.40 in 2007, and dropped to $2.30 in 2009, according to Market Insights/Torcivia.

These statistics clearly show that the lumber prices are increasing at a faster rate than the flooring prices have, according to Mike Millard, general manager of operations at McMinnville Manufacturing Company. And Millard thinks that the situation could get worse before it gets better, especially “if we have a lot of wet winter weather.” Millard believes that the small increase in housing starts has and will continue to put pressure on flooring demand, and that prices will continue to increase if the supply of lumber does not improve. With fewer loggers and sawmills to supply the raw material, Millard thinks this is unlikely.

There is a bright spot, though. Millard states that there is a strong demand for poplar right now and that sawmills prefer to cut it at this time because they fear that the market will weaken and they will miss their chance to take advantage of the current market condition. “They can run their mills much more efficiently on poplar than other hardwoods because it saws much easier,” says Millard. This will have an impact on pricing for oak and other hardwoods traditionally used for flooring.

Fortunately, not all flooring sales are directly tied to new home construction. As the economy recovers, so does the remodeling market.

There is a sense of confidence among the hardwood industry leaders. Boa-Franc’s Thabet muses that “the sawmill industry has been going through very difficult times in the last four to five years,” but that “wood flooring is a product of choice and has to be sold on its merits, not on price.”

Mullican’s Poland predicts an even brighter future for the industry. “There should be a further nationwide sales increase due to new residential construction in 2013,” he says, but even more impact will be felt with the tremendous market surge expected in New York and New Jersey as a result of the devastation caused by Hurricane Sandy. Poland explains that this area represents the largest solid hardwood market in the world and that “our industry should experience explosive growth due to the massive reconstruction” related to the storm. This is good news for the entire wood flooring supply chain.

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